Posted
by
Soulskill
on Sunday October 04, 2009 @12:17PM
from the chinese-imports dept.

Reuters has a report about research being done on the in-game economies of MMOs like EverQuest II and World of Warcraft to better understand much larger economic situations in the real world. The games are used as case studies where researchers can do controlled experiments that they couldn't necessarily attempt if real money or goods were involved.
"After studying 314 million transactions within the fantasy world of Norrath in EverQuest II, including trading in-game goods like armor, shields, leather, herbs and food, the researchers were able to calculate the GDP of one of the game servers (the back-end computer that hosts thousands of players in one world). As more people opened accounts and flocked to Norrath, spending money on new items, researchers saw inflation spike more than 50 percent in five months. 'We have seen that kind of volatility during times of war and in developing nations in the real world,' said [Dmitri Williams, assistant professor at the USC Annenberg School for Communication]. 'Our own economy has turned out to be less stable than we'd all assumed.'"

While I myself enjoy playing the MMO economy micro-game, they are far too simple to really map anything close to the real world. Or at least I should say WoW's is. Some of the less popular MMO's have very realistic economies involving business entities, more niche goods, and even a kind of country proxy.

The examples of what the researchers have discovered also strike me as academically uninteresting (even obvious) and make me wonder if this is an excuse to play some games at work....

The problem with that idea is that the game economy is built with assumptions in mind. These assumptions will generally be based on theoretical economic models. So generally all you achieve with such experiments is confirm your built in beliefs. Chicken, egg anyone?

A similar claim was made about SimCity when it was big, that it would teach about urban planning, but it had so many assumptions built in to be worse than useless.

I agree with your point; on one hand, there are a lot of data that can be collected from the economies of video games. The challenge, as you mentioned, is making that data relevant outside of the realm of that video game (or of video games, in general). I agree that the games probably can't be valid models of real economies (or cities, etc.).

That said, I'd not be surprised if they could extract useful behavioral information out of the data. Not information about how the economy works, but rather how people act when faced with various economic events and circumstances. Players could probably be mapped to social and regional demographics by qualities such as their characters' net values, activity, and primary sources of income. Patches, updates, and expansions can be mapped to technological breakthroughs and innovations, and resource scarcity and overfarming can be mapped to depressions or natural disasters.

There are plenty of real-world economic events that might be mapped and studied to research how the players in various "classes" react, such as:

I would think that even the behavioral information out of the data is especially tainted. People react to situations partly based on how they understand the system. The more they play with it the more they are able to game the system. It's going to take some very sophisticated analysis to be able to differentiate between gaming the system subject to the constraints they are given, and how people would otherwise react in real life.

Also, another critical problem is that the people who play these games are sel

Absolutely, Any computer program is based on models, and those models are based on assumptions. While something like a physics engine can work because the assumptions in physics preclude most superstitions, the same cannot be said for economics.

Economics often, for instance, still talks about the invisible hand and the rational deterministic consumer. Economics still insists that there is one or a very small number of persons that can be successful, and therefore this one or very small number of people

Economics is different, as in this case, it is REAL PEOPLE making decisions, rather than what a computer model would assume that people would decide. You can administer a MMO in many different ways and achieve many different effects, which would create any number of economic situations. In general, since the games are marketed toward players, free markets tend to reign, as that is the only way that each player can maximize their fun (rather than being subjected to the imbalances created by central plannin

I could not build a city block that was half commercial and half residential.

Actually, you could, but it required bulldozing. In the original simcity, you only deleted the 3x2 (as I recall, maybe it was 3x3?) block if you bulldozed the middle. You could bulldoze the edges and get a reduced-size or unusually-shaped block. The only disadvantage was that larger buildings could then not be built. Later games in the series let you place individual cells of residential and commercial.

Unfortunately, the cellular automata model used by the games was heavily biased towards the US model

These experiments are not as useful nor controlled as you may think. Let me break down into some experiment design principles here:

#1 You can only generalize to the population studied

--Thus your demographics will be that of a more computer savvy user, with leisure time. This is NOT a representative sample of a normal population. When using regression methods you will get a homogenous result only from 'game performers'. These experiments are not valid unless you can prove that there is no purposeful difference between this population and the general population.

--It still can provide interesting insights, but any quantified data must be taken with a grain of salt

--The population may have one net effect, but perhaps a different type of agent/actor would have an OPPOSITE or equalizing effect (games are an artificial setting)

#2 Process defined by agency

--Here the markets are designed by an all-seeing game developer. I don't know about you, but many MMO's I have participated in had lackluster markets due to poor UI or the mere fact that it is a new market.

--Product innovations are limited or non existent, and users cannot refine markets based on their experiences. These days the most interesting economic studies are looking at PROCESS which is understood much less than outcome. Neo-classical economic theory does a great job at explaining outcome, but is horrid at process. That is why many market failures are not forecasted, but instead studied post-mortem.

Good points, though I doubt those issues would escape people whose day-job involves economic analysis. To me, this entire trend of studying MMO economies to somehow derive real-world conclusions smells of professional self-doubt regarding the status of economics as a science.

I know that some economists have, over the past decade or so, started performing little experiments, in the hope that this would lend more empirical credibility to their field. Of course, the main problem is scale, since getting a f

Is there any reason why a computer savvy person will act so differently than someone who does not use a computer? We're talking about making decisions based on many fundamental human drives such as self-interest, reciprocity, emotions, etc. These go all the way back through evolution.

Anyway, currently economics spends most of its time making sweeping assumptions about the whole of humanity based on the most simple theories about what drives behaviour - so any attempt to study real people is a step in the ri

While you raise some good points, I think you overestimate the need to be computer savvy to play MMO games. I've met a number of people that use their computers almost exclusively to play EverQuest--I had to walk one through the process of copying and pasting text in Notepad, for example.

many MMO's I have participated in had lackluster markets due to poor UI

It's funny you say that -- I would actually say the opposite from playing WOW. The auction house in WOW is effectively a *single* source of all items non-NPC-purchaseable items.

Real life has a MUCH worse UI. I have to check Best Buy, then Newegg, then Amazon, and who knows if a place 1 mile away from me actually has a better price! The game also lets me (through addons) see historical prices, price averages, and let's me trivially undercut competitors when selling goods.

You can learn tons from games. Yesterday was explaining that when the taxes get rolled into the free parking kitty, money doesn't leave the system- it only gets redistrubuted leading to massive inflation from passing go. Also was explaining dice statistics and why it was better to build a house on this square versus that square based on the two people 5-7 spaces away.

Up to a point. They may design the rules, the central banks, the inflation/anti-inflation schemes, incentives against cheating and farming, a big lot of stuff.

But they can't design player behaviour. If players don't act as they think they do, those economist designers won't achieve their goals. It should be a very educational experience, designing an entire economic system and seeing if it behaves as you think it will.

In MMOs, everyone is "employed" or capable to make money (not to get rich, but still to participate actively in the economy) by themselves. Things like food or where to live are not big problems, neither is maintaining a family usually. And there aren't laws (like patents) giving individuals virtual monopolies.

But still there is commerce there, sharing several of the rules of with the real world one and behaving in good part like it.

This isn't universally true... some games have virtual monopolies (this actually used to be a HUGE problem in EVE Online, where a small number of people used to control the blueprints to make some of the most valuable ships) and while everybody has *some* ability to make money in all of these games, it amounts to what a kid could make cutting neighbors' lawns - irrelevant compared to what people who've actually made opportunities for themselves have.

Why not look at the Eve online economy? The Eve system is a lot more flexible, largely player driven and a LOT more players involved. This should more accurately model real economies.
Then of course, eve have already had a lot of attention for this reason, so perhaps they wanted to do a more novel study.

the thing I don't understand about money is, why don't more people make it? there's no law against creation of local currencies. [wikipedia.org] some cities do have them. fortaleza, brazil, has a community with a currency called "palma" [bancopalmas.org.br], switzerland has the WIR bank [wikipedia.org], ithaca has the hour [ithacahours.com]... it's problably the best way for a community to change, develop and become self-sustained. economically, ecologically, and in other ways. money is, in reality, just a contract, a document - shows that if you help someone, give something, someone else will help you, give to you. as long as the contract works... who cares who filled it out, printed the form, bill, wrote the software, or if it's electronic, paper, or just a paper ledger [wikipedia.org]. the only hard part is creating a community that realizes it's in their best interest to run their own economic system. open-source software could perhaps benefit from adoping something similar for rewarding programmers more.

I think in the United States, it's illegal for anyone but congress to create legal tender.

The purpose of creating a federal government was to standardize trade between the states, and the creation of a common form of currency was one of those standardizations. It's a power given to the congress directly by the constitution, rather than the later programs which are given by loopholes in section 8.

States can't make currency other than silver and gold (if only they would...). The constitution does not restrict the rights of individuals to issue their own currency. If it did, things like "Disneybucks" would be illegal.

The Constitution would have done better to mandate that ALL government issued currency be in silver and/or gold to prevent the meltdown we are now seeing.

I actually think that any entity (Your group of friends, your city, your county, your state) can print it's own money. However, if you are selling goods to the public you must ALSO accept United States Currency and must be able to trade between the two freely back and forth as long as the money is backed by the dollar.

At least one Massachusettes town (Southern Berkshire) prints and circulates its own money. It supposedly helps local business flourish in a way I don't understand. Basically you go to the

The problem is that all currencies have to be backed by something. I can create my own currency and tell people to give me money for pieces of paper with my face on it, but who is going to accept it? The US currency is basically backed by the reputation of the US saying that it will be worth something in the future. Other countries may tied their currency to a mineral or to another currency. But, in the end it has to be backed by something, and it will then be at the whim of whatever backs it. Be that

'backing' is needed only if you're looking for a long-term value deposit. if you're looking for a currency useful for everyday trading, all that matters is that you can spend that currency on something you need. so if there's a few local stores that accept the currency, you're set. but of course, not just anyone can print the currency. it doesn't even actually have to be printed, in fact, but some places do.

The study would be useful, only if we printed our money without any regard to the amount of it. That is the basic problem there, there can be no lack of credit in virtual economies, while we know there can be one in the real world.
Next, you have to transform most entities in the virtual world into entities in real one. Because, you will never have a raw diamond more expensive, than a well crafted diamond jewel in real life. Yet, in WoW it is usual to have items that are found raw more expensive, than thos

I very much doubt that online games can ever provide any decent economic modelling. The things that make most people risk-averse in the real world are largely mitigated online.

It may be terrible to lose your character or his equipment in the MMORPG universe, but you'd have to be pretty far gone in order to feel the same way about that as you would about losing your job / house / car.

Right... as if someone with knowledge of real world economics could actually be put in a place of authority.

My thought was something like this. Specifically, from the summary:

Our own economy has turned out to be less stable than we'd all assumed.

Well let's see now. We have fiat currency instead of representative currency (an example of which is the gold standard). Furthermore, the way fractional reserve banking in general and the Federal Reserve in particular is set up, there is always more debt built into the system than there are dollars in circulation. That's because debt is attached to money the moment i

"This system is just not sustainable. How could it ever do anything but ultimately fail? Who are these people who expected it to be a paragon of stability and sustainability?"

The same thing was said about the gold standard, every tom dick and harry intellectual thinks they "know" how to run an economy I call 100% BULLSHIT. Especially austiran economists, some of the most dogmatic, ideologically driven people on the face of the earth.

The real issue is that because society has become so specialized and because we use money as a store of value it's one of the KEY components of why society is so unstable because in a specialized society money must constantly be circulating between people and real goods, the problem is jobs and industries are not permanent in economies, they are constantly in upheaval being moved around, created, or destroyed because and because we only pay people if they have a job or are working, the people without jobs for any length of time start to put stress on the system.

Money ideally is supposed to keep track of debt's and obligations but here's the thing: As a medium of exchange it can't deal with the real world upheavals complexities of specialized society.

Even if austrians got their way by eliminating the fed they would have all the same issues under the gold standard, because monetary policy is only one aspect of the economy, the other is to keep money constantly flowing between those who need it (for necessities) and those who produce them (the businesses), the problem is their becomes large asymmetries because of our technology and ability to do more things with less people, which leaves a huge surplus population in a precarious, temporary and unstable jobs as the march of tech moves on and people simply can't keep up with the real world technological and political changes taking place.

Inflation is nothing more then debt and risk distribution, if Group A charges more for necessities B, the group with the least money is constantly being indebted by inflation.

Certain kinds of inflation (not all kinds) of course is an aspect of using money as a medium of exchange.

"This system is just not sustainable. How could it ever do anything but ultimately fail? Who are these people who expected it to be a paragon of stability and sustainability?"

The same thing was said about the gold standard, every tom dick and harry intellectual thinks they "know" how to run an economy I call 100% BULLSHIT.

Lol! I guess you know better, and we should trust you instead? As well as all the people claiming they know how to "run" an economy but somehow keep getting proven wrong.

Especially austiran economists, some of the most dogmatic, ideologically driven people on the face of the earth.

Not sure what "ideology" you think the "austiran"[sic] economists are espousing. More like they have developed a theory of economics that has been proven to predict results over and over again, including the current state of the economy. keynesians keep claiming that Austrian school is old, outdated, discredited. And yet their own theo

More like they have developed a theory of economics that has been proven to predict results over and over again, including the current state of the economy. keynesians keep claiming that Austrian school is old, outdated, discredited. And yet their own theories of how they should be able to use central planning to produce bust-free perpetual growth somehow never works.

Somehow, I feel like I look at a post that was written three years ago.

Now, whatever one may think about the post you are quoting...he certainly is right in saying that Austrian economists are *very* dogmatic people. Austria is a deeply "social-capitalist" (read: Socialism Light) country, we have no political or otherwise opposition (all our parties are either socialist or nationalsocialist, with the exception of the Young Liberals which only ran for the EU elections and got almost no votes because they couldn't afford an election campaign) to that dogma here, and it likely wi

Interesting theory. Should I subscribe to your newsletter? I really can't follow what you are talking about here - it sounds like you think money itself should be eliminated. Do we go to barter? Is that supposed to "keep up" with upheaval and complexity better?

The problem is that money as a store of value is problematicc because people can't just wait forever for food/electricity/clothes/housing, an austrian run economy would quickly devolve into one where there would revolution I have no doubt, because they'd be forced to realize the world is a physical place and their theories of human action break under constraints of physics and physical systems and their transformation.

Any theory that does not account for how the world actually is physically integrated into

That's a pretty long-winded way of saying you don't understand economics. But at least it's a good starting point.

You may not like "money" (however you define it) as a way of allocating resources, but it's the only one we have right now. Maybe some day we could transition to something like the "reputation system" envisioned in Accelerando, but we have to work with what we have to work with now.

The arguments you make point to Austrian economics working better than anything out of Keynesian, as it is closer to following physical assets than the artificially controlled fiat money that Keynesians prefer. Yes, even with real assets being used as a medium of exchange, there will be bubbles and busts, but they will be very much limited to specific industries or companies, rather than across the entire economy like happens now. But that's because entrepreneurs have to make guesses about the future - it can't be predicted in any deterministic way, since it involves human behavior. But it's a better system than letting a few central planners make those guesses for everyone, because they can never be as accurate as millions of people making their own guesses based on experience and self-interest.

You may not like "money" (however you define it) as a way of allocating resources, but it's the only one we have right now

All tangential discussions of the value of money aside, I believe the studies will point out two things:

(1) That it's quite possible to get a grant to play computer games (disclosure: level 80 characters here, plural, think it's a good idea;P);

(2) People may become aware that money exists primarily as numbers registered in one of a number of accounting systems, and nowhere else. If you think about it, most MMORPG's have a hierarchical system of banks and a means for transferring numbers (call it "gold piec

"That's a pretty long-winded way of saying you don't understand economics. But at least it's a good starting point."

This is exactly why I don't talk about economics, you exemplify my point:

"Most people are way too narrowminded to entertain thoughts that don't speak their language or to their master conceptions or theories they fancy, thats what I hate about not just austrians, but all economists."

You think I don't understand but that's simply not the case. No man has a monopoly on the truth and there are m

No man has a monopoly on the truth and there are many different paths to it and ways it is expressed, you dislike the way I express my factual observations so you accuse me of not understanding economics.

I didn't accuse you of that, you stated it yourself. And I pointed out that it's a good starting point, because no one person or small group can understand macro economics well enough to be able to plan and manage it. Which is the point.

If I didn't response to some of your points that you felt were relevant, it's because I didn't understand your basis or point you were trying to make. Yes, there are many "ways it may be expressed", etc., but you have to find some common ground that allows you to commun

Except that bubbles are natural outcome of using money, bubbles will ALWAYS occur under the fed, gold standard or not.

removing FED would work much better than what we have now. In 19th century the US economy was stable and after FED creation in 1913 we had several serious recessions.

Bubbles happen because there is fast, steady influx of new players who want to profit quickly - you only have to put some cash on the table to enter the game and 2 years later you get guaranteed +50% in return. Where do players get their money to enter from? They take loans. If there was a limited money pool and no central planning, interest ra

In 19th century the US economy was stable and after FED creation in 1913 we had several serious recessions.

What? That is absolutely, preposterously false.

The 19th century economy in the US was cyclical, just as today's economy is. But the recessions were much deeper than what we've had in the 20th and 21st centuries (though for the current recession, we'll need to see how bad it gets before passing judgment).

You need to read some economic history, and stop reading (and believing!) what random people hav

Inflation is too much money chasing too few goods. Prices go up because there's more money in the system and production of goods is either stagnant or declining.

Prices depend on the velocity of money, too. If everyone decides to hang on to their money more tightly, so that each piece of it changes hands half as often, say, then the amount of money in the system can be increased without causing inflation. Making it impossible to adjust your money supply (which is all the gold standard really achieves) doesn't eliminate inflation and deflation, it just removes a potentially valuable policy response to changes in things like consumer confidence and the savings rate.

Inflation is too much money chasing too few goods. Prices go up because there's more money in the system and production of goods is either stagnant or declining.

Prices depend on the velocity of money, too. If everyone decides to hang on to their money more tightly, so that each piece of it changes hands half as often, say, then the amount of money in the system can be increased without causing inflation. Making it impossible to adjust your money supply (which is all the gold standard really achieves) doesn't eliminate inflation and deflation, it just removes a potentially valuable policy response to changes in things like consumer confidence and the savings rate.

Here, you are just talking about some of the mechanisms of inflation. A better way to describe it is the amount of capital in the system. If, as you suggest, the response to reduced spending is for a central planner to increase the amount of fake money, then prices are propped up when they should naturally be falling. Eventually this will catch up with you when people start spending, and you'll have to raise interest rates and inflation will take off.

Here, you are just talking about some of the mechanisms of inflation. A better way to describe it is the amount of capital in the system.

Capital is something you can use to create a stream of (real) goods and services - a factory, a shop, a train, a house. You can't (directly) change the amount of capital there is in an economy by creating and destroying money. Money is, in essence, no more than an assignment of abstract numbers to people. It's pure information.

If, as you suggest, the response to reduced spending is for a central planner to increase the amount of fake money, then prices are propped up when they should naturally be falling.

Firstly, why should they be falling? What does having the price of everything fall or rise achieve that an increase in the money supply with constant prices does not?

Firstly, why should they be falling? What does having the price of everything fall or rise achieve that an increase in the money supply with constant prices does not?

Well, your premise was that you could increase the money supply without inflation when "everyone decides to hang on to their money more tightly". The response that should be to drop prices, so people will buy more. Not sure what else you were referring to - if people are holding on to money, they are not buying goods, yes? So maybe because prices are too high?

Secondly, price falls are a very difficult process to a point where this process doesn't really work. This is really the nub of it, if prices were not sticky the gold standard would work. Workers and unions defend wages, firms may need their input prices to fall before they can fully reduce their output prices, competitors wait for someone else to move first, homeowners hold out for house prices which are months or years out of date, etc. Prices stay high for months or years and resources get underused, including labour. If everyone could agree to reduce their prices together there'd be no problem, but it's a coordination nightmare compounded by money illusion. Why bother when the state can adjust the money supply? It's like changing the clocks to do daylight saving....we/could/ have the same effect by all agreeing to adjust all of our schedules, opening times, etc. all at once on the same day whilst keeping the time the same. But it's much easier to change the defined time of day.

You're making a preconceived assumption that everything has to be centrally planned. BTW: when industries do this it's considered price-fixing and

He notes, for example, that changes in M2 are preceeding changes in M0 (which by itself invalidates Austrian theory, by the way).

No, it doesn't. It just shows how the Fed manipulates the economy. Just because banks know that they can go to the Fed or the Treasury to get more debt or a bailout when they are in trouble doesn't mean that it's caused by rational decision-making, it just means that the banks understand the kind of system they are working under, which allowed private profits to be made, and that risk is mitigated by allowing huge debts to be socialized by the tax system.

But not always the debt is unsustainable - if you have real growth, then growth in debt can be sustainable. That's the basic advantage of FRB with respect to gold standard - unlike gold standard, FRB can adapt money supply to finance real growth.

And how do you determine what is "real growth"? We had lots of growth during the dot-com boom, financed by cheap debt. Yet, it couldn't be sustained. I wonder why? Keen (and Minsky) don't seem to be able to explain this. They continue to proposed the same policies that failed then, and are failing now.

With gold standard, it pays off to hold on money during real growth, because money increase value, and it means nobody wants to invest.

Actually, the opposite is true. You don't get "growth" by holding onto money, even if it's gold. Even on a gold standard some inflation occurs. The only way to increase your saving (or keep it from losing value to inflation over the long term) is to invest that money in some value-creating enterprise.

But they are both inherently unstable, because the debts can grow even if there is no corresponding real growth.

Exactly. Especially when, for instance, the Fed keeps interest rates artificially low, creates a housing bubble, and people borrow money against and artificially inflated home value. If the interest rates were allowed to go up in response to the reduced savings, the bubble would not grow so large and the adjustment would be short and easy to deal with, instead of creating a global crises like this one did.

In addition to that, I would add that money that is held in a savings account under a gold standard is loaned out. Even if the person who had wealth were to take their money and put it in a safe for a hundred years, it is still doing good. It makes all the other gold held by every other person more valuable, as he has reduced supply. He has pumped power into the economy in exchange for nothing, or at least a highly delayed reward.

In a fiat system, on the other hand, that money that is hoarded away is

No, it doesn't. It just shows how the Fed manipulates the economy. Just because banks know that they can go to the Fed or the Treasury to get more debt or a bailout when they are in trouble doesn't mean that it's caused by rational decision-making, it just means that the banks understand the kind of system they are working under, which allowed private profits to be made, and that risk is mitigated by allowing huge debts to be socialized by the tax system.

I don't think they knew, at least at the beginning of the crisis. It wasn't obvious at all. Anyway, your statement makes any statement about economics irrefutable, because we can always argue "they knew the government will do this and that". I think you would have to come up with proof that they knew that (for example, internal communication among banks) for me to believe this.

And how do you determine what is "real growth"? We had lots of growth during the dot-com boom, financed by cheap debt. Yet, it couldn't be sustained. I wonder why? Keen (and Minsky) don't seem to be able to explain this. They continue to proposed the same policies that failed then, and are failing now.

You can't determine that - that's whole point of investing. But the point is, real growth does exist - we have advances in manufactu

No, it doesn't. It just shows how the Fed manipulates the economy. Just because banks know that they can go to the Fed or the Treasury to get more debt or a bailout when they are in trouble doesn't mean that it's caused by rational decision-making, it just means that the banks understand the kind of system they are working under, which allowed private profits to be made, and that risk is mitigated by allowing huge debts to be socialized by the tax system.

I don't think they knew, at least at the beginning of the crisis. It wasn't obvious at all.

So, you've never heard of the "Greenspan put"? The bankers and Wall Street certainly have.

for every X dollars in circulation there is always X+Y debt. This system is just not sustainable. How could it ever do anything but ultimately fail?

There is nothing unsustainable about it. The X dollars in circulation just have to circulate fast enough. If fractional reserve banking has a flaw, it is the same thing that is its main advantage, and that is that it adepts to the demands of the economy. It amplifies both good and bad intentions of making use of money.

In the last 30 years there has been a lot of bad intentions going on, building on bubble after bubble. But blaming it on FRB is just plain wrong. There are real things in the economy that are unsustainable. Having the debt levels rise faster than the income levels would be one such thing. Having the lower and middle class owning a lesser and lesser percentage of the wealth would be another. And it isn't difficult to find more examples.

Having said all that, there are of course faults in how FRB is implemented in the US. There is for example no reason why a government should need to get in debt just to create money. That has nothing to do with the basic idea of FRB. Having a private institution running the money supply is another very stupid idea. Finally, you need regulators and law makers who generally aren't corrupt to ensure that the FRB system isn't abused. And that last thing is something that doesn't exist in the US right now, or most banks would have been shut down already, just by looking at their balance sheets. The only thing keeping the banks alive is corruption.

is that this system as we know it came from the Great Depression

Yes and no. The system today mostly has its origin in the 1980s. It may look similar to the old system, but all safeguards and general ideas of sanity has been removed as an ongoing process to promote "modern" capitalistic principles. The idea of balance has been totally abandoned and instead the concept that anything is right as long as it produces higher numbers has been promoted.

You managed to have a bit of observational sanity. However, you would be better off rejecting monetarist theory. Try this. The physical economy is deflating, the money supply is hyper-inflating. Debt is increasing faster than money. So, big crash.

The historical analogy is to Wiemar Republic 1923. So we will have a blowout this year, perhaps as early as this month. Reasonable people differ on how bad it will be. This month I am looking at the October 19th to October 25th period specifically.

The money supply is hyper inflating? M1 yes, but not everything else that is used as money. Printed money is up a lot as the federal reserve is trying to compensate the loss in debt and asset money (which they can't without really causing hyperinflation. But that money is mainly sitting in bank vaults so far, acting as little but deleveraging money.

If it actually started getting out to the population, then we could start seeing inflation. But as companies aren't borrowing, and consumers aren't borrowing, an

This is a good monetarist argument, but I find it hard to make predictions about reality based on something that is not real. The fundamental issue in economics is the nature of wealth. People early on tried land and gold. Here I am being a little cynical, but I think it fair to say the Soviet Union tried the sweat of the worker. Now the question is deliberately obscured as inconvenient.

I claim the monetarists says wealth is money. Gambling money, farm money, all the same. But we know the Weimar Repub

I think you're confusing cause and effect. For example, in hyperinflation, it's true that people will tend to spend their depreciating money very quickly. However, the currency is not losing value because people are spending their money quickly; the currency is losing value because the government is rapidly expanding the money supply.

Why do you think we had deflation during most of the 19th century? Because people spent their money slower an

I think you're confusing cause and effect. For example, in hyperinflation, it's true that people will tend to spend their depreciating money very quickly. However, the currency is not losing value because people are spending their money quickly; the currency is losing value because the government is rapidly expanding the money supply.

Did you ever notice that bubbles tend to grow when the fractional reserve banks are quickly expanding the money supply, and bubbles tend to pop when the rapid expansion finally slows or stops? There certainly seems to be a connection.

Cause and Effect. Why is the fractional reserve banks expanding money supply. Simple, because there is demand.

They said, "Don't inflate the money supply."

The M1 supply has always lagged behind the market, not the other way around. But austrian economists are just as little interested in facts as the keynesian economists.

" But, unlike in previous panics, Hoover did not listen. He intervened, and the economy grew worse. Then Roosevelt intervened even more, and things got so bad that we now call it the Great Depression. And then there was WW2, which further devastated the economy. Finally, when the government lifted the war-time price controls, prosperity returned.

Talk about rewriting history.

But now, Hoover is remembered as a non-interventionist, when he in fact intervened more than any president before him. Perhaps Bush will be remembered as a non-interventionist as well, because, just as Hoover did not intervene as much as Roosevelt, Bush did not intervene as much as Obama.

Fucking with the economy? During the 90s and 00s, the economy had the least regulation since the great depression. Reagan and the following presidents all saw to that. The Austrians got what they wanted. Of course, they forgot to include the corruption that comes with it. They always do, because Austrians economy is like a game economy. Totally unrealistic when actually implemented in reality.

No, Austrians didn't get what they wanted - interest rate was not decided by the free market forces but by arbitrary decisions of the FED. When people rapidly get loans in ridiculous amounts, it should end up quickly raising interest rate to the 2-digit range, yet it was kept near 0 because it stimulated the economy, kept that frightening R-thing at bay and produced nice GDP growth numbers - debt driven consumer spending is so good and financial institutions leveraged 50:1 have ridiculously high profits to

You say that it is sustainable, please elaborate. Because unless you're ignoring the presence of interest rates, the money owed will always exceed money existing. This ends with people or businesses going bankrupt unless there is perpetual growth

This is basic economics, and has little to do with FRB. But anyway, the answer is that money circulates. As long as those who lent out money uses the interest they collect to buy stuff from those in debt, everything remains balanced. Theoretically I can pay back a $100 loan with a single dollar bill, as long as I pay it back $1 at a time, and the one I pay it back to keeps buying stuff from me.

Of course, the real problem here is that borrowing to consume is bad as you won't have anything that the borrower will want to buy after you consumed, so you won't be able to pay him back. Borrowing to buy something at bubble prices is also bad for the same reason. You won't be able to pay back what you borrowed.

Borrowing is best done on actual stuff that increases productivity. Specifically, when the interest on the loan is less than the productivity increase. In that case both parties of the transaction profit by getting part of the productivity increase.

And what backing do you propose? Gold? Largely artificial value. When someone finds a new gold vein, you suddenly have devaluation of the currency, because the supply increases, but you have much worse problems than that. The big one is that there is no incentive to spend.

Lots of posters in this thread seem to thing that inflation is bad, but in limited amounts inflation is essential for an economy working on existing principles. Money is used for two things; as a medium of exchange and as a store of

Fractional reserve banking by definition causes debt levels to rise faster than income levels since it is ultimately income which provides the reserve which is only a fraction of the lending. Allowing banks to create chequebook money out of nothing and lend it out at usury causes a transfer of wealth to them from the lower and middle classes.

Bullshit, bullshit and bullshit.

The reserve is a multiplier of the base money supply which varies depending on the current economy's demand for money. The multiplier also has a cap which is dependent on the reserve ratio, but it rarely comes into play, as it is the demand of the economy that dictates everything, and not the other way around. Banks can at most be more or less leisurely with how they lend out money, and as such what risks they take. But that is it.

[T]he way fractional reserve banking in general and the Federal Reserve in particular is set up, there is always more debt built into the system than there are dollars in circulation. That's because debt is attached to money the moment it is created; i.e. for every X dollars in circulation there is always X+Y debt. This system is just not sustainable. How could it ever do anything but ultimately fail?

Dear Parent, I presume you understand the fractional reserve system so you can skip down to paragraph 4 whilst I provide an Economics 101 refresher for the gallery (and this really is first-semester stuff; I taught it earlier this year):

You and all your friends deposit money at the bank. The bank holds a fraction of the money in reserve (hence the name), at minimum the amount the law specifies, usually plus some amount X. We'll come back to this. The rest of the money it lends to people who want to borrow it; they pay interest, you get interest, the bank takes a cut, hooray.

These borrowers spend the money, and the people who get it stick some of it back into the bank, where the cycle starts afresh. It depends on how much money the bank holds in reserve and how much the populace deposits but, yes, usually there is more debt around than originally produced currency.

Now, you claim that this is a Bad Thing (TM). You don't state why. Presumably you are relying on the intuitive logic that having more debt than official assets can't be good. That intuition relies on the following crucial point: having more debts than assets is only a problem when people try and collect on their debts. Amazingly, this very rarely happens.

You have the absolute right to go to the bank and demand your money, in bar. All of it. Buy who does that? Practically no-one. You ask for a portion of it; some here, some there, more at Christmastime and during the holidays. So long as the banks have enough money to give everyone what they want – and this is the amount X from above – holding the rest of it would just be inefficient, since none of the depositors want it and there are plenty of borrowers who can do productive things with it. Fact: if the banks decided to hold more money in reserve, the government/central bank would simply create more 'original' dollars until the effective level of money is back where it was.

The fractional reserve system does have its problems. But the problems lie in deciding how high the reserves should be – too low, and when people do decide they want their money everything comes crashing down (e.g. AIG). Too high, and businesses can't borrow money and productive potential lies wasted (e.g. the current situation in much of Europe and the US).
But the system is not inherently flawed. If the right level of reserves are held – and this is usually the case – the system provides a much more flexible and efficient supply of money than a representative currency.

I can agree with the way fractional banking works in the private sector. I don't think a bank should be regulated on how much money it holds in reserve. Instead, it should have to tell it's customers how much is held in reserve, then let the people decide if they want this bank or that bank. If there is a run on a bank, guess you learned your lesson the hard way.

The problem I have is that the FED doubled the money supply in a year. If that gets into the economy at large you will have to pay $10 for your a

Is there actually a "right" level of reserves that can withstand crises, though? Crises feed on themselves, and bank runs have happened throughout history. If people are really convinced that the financial system is going down, everyone will demand all their money, so the only safe level of reserves is damn near 100%. This can be mitigated somewhat if government props up the banking system, e.g. through deposit insurance, but it doesn't fix itself.

Is there actually a "right" level of reserves that can withstand crises, though?

There is, but unfortunately it's not the same level that's "right" for the non-crisis time. Ideally the financial sector would see the crises (or rather, the change in demand for or supply of reserves) coming and adjust, but that obviously doesn't happen when external shocks occur.

Yeah, uh, you kind of miss the point here. Rothbard, "Fractional-Reserve Banking" and "Anatomy of the Bank Run", game over, you lose.

The problem with FRB: it constitutes fraud. While I maintain that this statement is prima-facie obvious, I have the feeling that it will escape some portion of the crowd, so we'll try a thought-experiment.

"Fractional reserve" banking says that for every, say, $1000 of demand deposits (ex. checking accounts), the bank need only keep some fraction available at any time, on th

The system you described is classical fractional reserve banking. Understand, however, that we no longer operate under that system (why it is still called fractional reserve banking is beyond me). Rather, for the vast majority of transactions, there is no reserve requirement. That's right, THE BANKS CAN GIVE OUT AS MUCH MONEY AS THEY WANT, REGARDLESS OF RESERVES. This is what people are referring to as "printing money", although that takes other forms as well, mainly with the Fed printing money to buy t

If THE BANKS CAN GIVE OUT AS MUCH MONEY AS THEY WANT, why was the biggest short term problem with the recent crisis, that banks could not borrow money from other banks*? If they could just give out money they would not have any need to borrow.

And I admit i don't know how the USA bank system work, but banks in the rest of the world can't lend money they don't have so if the bank want to lend me 1$ it need to either have a person who have 1$ on his account, or the bank need to borrow 1$ from an other bank**

We have fiat currency instead of representative currency (an example of which is the gold standard).

The gold standard isn't actually different in this respect, because gold has very little nutritional value and sucks for building things.

Furthermore, the way fractional reserve banking in general and the Federal Reserve in particular is set up, there is always more debt built into the system than there are dollars in circulation. That's because debt is attached to money the moment it is created; i.e. for every X dollars in circulation there is always X+Y debt.

I thought it was actually that there was X-Y debt.

The real joke, though it's not a funny joke, is that this system as we know it came from the Great Depression. Its purpose was to ensure that such depressions would not happen again. By that I mean, this is how it was sold to the public. Isn't this typical, that an undesirable system that would not otherwise be accepted is proposed during a time of crisis and becomes entrenched? It's not like we have never seen that pattern before...

Which parts exactly came from the great depression? I seem to recall fractional-reserve banking being a bit older than that.

If the Fed confirms that financial institutions create money through loans can I stop having this debate with people over whether this is actually so?

Um, I know they create money that way. But the amount of money created is the same as the amount of debt created, not less. So the question is where the initial money comes from... which I think is the government printing bills or the electronic equivalent, and I don't think these involve debt. They certainly don't involve more debt than the amount of money produced.

Well let's see now. We have fiat currency instead of representative currency (an example of which is the gold standard). Furthermore, the way fractional reserve banking in general and the Federal Reserve in particular is set up, there is always more debt built into the system than there are dollars in circulation. That's because debt is attached to money the moment it is created; i.e. for every X dollars in circulation there is always X+Y debt. This system is just not sustainable. How could it ever do anything but ultimately fail? Who are these people who expected it to be a paragon of stability and sustainability?

Interesting thought - I think I agree (if I have understood what you are saying correctly). But isn't indebtedness at the very basis of Capitalism, at least as we know it? To me at least, it seems that "growth" is the central theme in Capitalism, and the idea that one can somehow "create wealth" is put forward as a fundamental truth; but it always presupposes the existence of unlimited resources that we can "borrow" from. I say "borrow" because these resources are in reality not unlimited, but have been lai

But isn't indebtedness at the very basis of Capitalism, at least as we know it?

Indebtedness is the basis of pretty much any system involving money. (Capitalism is different, I don't think there's any reason why you couldn't have capitalism without money). Suppose I, say, wash your car and you give me $10. What does that $10 represent? The fact that I've done something for the rest of the economy and it hasn't yet returned the favour. ie, my ownership of it represents a debt, in a very plain and old fashioned way. Since the whole point of money is to represent debts of this sort I don

In the real world you don't have unlimited resources. In the real world you can't release an expansion and suddenly introduce new products to replace everything someone owns. Studying in game economics can be useful as an exercise or example of how some economic principles work, but collecting data from MMO's and then trying to use that information to explain how the real world works?

I'll limit the scope of this comment to World of Warcraft as that's the one I have personally played. I would not be surprised if the other MMOs mentioned are similar, I just don't know for certain that they are.

I think the appeal is that it's a true laissez-faire free-market economy. Among those, it's unusual because the game rules effectively prevent any one player or group of players from forming a monopoly and locking out competitors. So I may have the market for healing potions cornered, but there is nothing I can do to prevent you from gaining crafting skills and harvesting herbs and making your own potions and competing with me. Your potions will be just as good as mine, and any herbs you harvest won't be available to me until they respawn, at which point they become available to both of us again.

I can see why this would be interesting to an economist. It incorporates a lot of our notions of what a free market is. In the real world economic freedom is generally considered a desirable thing, at least until players are so free that they can form trusts and otherwise monopolize markets. So in the real world, anti-trust laws and other government regulations provide the necessary restrictions that the game rules provide in the virtual world. If nothing else, it can provide a way to explore the degree to which such regulations are necessary and what happens when they are minimal. Perhaps this is to an economist what the computer simulations are to such scientists as physicists and astronomers. They can use it to model something based on how they think it works in order to refine their ideas of what works and what doesn't.

WoW also has a fairly large black market in the presence of illegal gold sellers.

If anything, the economics of MMOs are far less interesting than the socio-political aspects of the game. WoW is more or less set up to maximize character freedom. The police (GMs) are relatively ineffective, and apart from a few obvious things you aren't allowed to do, like call other players faggots in public chat, most anti-social behaviour is in practice insufficiently policed or not policed at all. I'm talking about things all the way from ninja looting and node stealing up to the use of illegal hacks (like the underground mining hack, for example). The small percentage of outright asshats on any server seem to be sufficient to prevent a general climate of trust from forming (even though most people are nice, and helpful).

The guild system is the only way where people can build decent trust networks, and these of course require human leadership. Even then, a good guild (meaning a guild with reasonable leadership and adequate policing) is hard to find and it can't get too large before it's too big to serve that function. But Azeroth as a whole suffers from severe social dysfunction.

I guess it just shows to go that any social environment would work just fine if only a way could be found to get rid of the 10% who are hell bent on exploitation, cheating, griefing and bending the rules to suit themselves (and these are the people who howl loudest at any attempt to fix things). WoW's economy suffers from many honest players having a disincentive to enter the market, because people who hack and cheat have an illegal competitive advantage. It's really no different from the real free market or the real world in that respect (a friend of mine who is a cop pointed out that the people who barely stay within the letter of the law are often as much of a social nuisance as genuine criminals - knowing some people I've seen in business, I am not surprised).

I think WoW stands as a living counterexample to all those who desire a lightly policed social system based entirely on consent.

It's really no different from the real free market or the real world in that respect (a friend of mine who is a cop pointed out that the people who barely stay within the letter of the law are often as much of a social nuisance as genuine criminals - knowing some people I've seen in business, I am not surprised).

Of course, it's most scammers' dream to find a scam that's legal too. For example, finding the right pyramid scheme, I'm sorry that's multi-level marketing system, that has just enough legal content that you won't go to jail. Or the people that start weird religious sects which tends to make them rich and worshiped - not even BillG gets that. Or the unserious gray market sellers that'll leave you stranded with an imported device the manufacturer won't support. Or those that fool little old ladies into inves

The difference with RL is that Blizzard will never bail The Big Guild going bankrupt because too many wipes/enchantments/etc etc..., but RL governments had to.

Regarding "had to", that is because in RL the equivalent of "The Big Guild" owns the equivalent of "Blizzard". If WoW allowed the players to purchase their own government, like we do in real life, then it would be a fair comparison.